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Tax Office gears up for 6-member SMSF bill

The ATO has flagged that if the bill to increase the number of members allowed in an SMSF is passed before 1 July next year, its systems may not be ready in time, but it will look to implement workaround solutions.

Earlier this month, a measure announced in the lead-up to the 2018–19 budget to increase the number of members allowed in an SMSF from four to fix was reintroduced into Parliament, after previously being scrapped prior to the federal election.

The amendments will apply from the start of the first quarter that commences after the act receives royal assent.

The bill was referred to the economics legislation committee on 3 September. The committee is due to report back on 4 November.

While the bill was introduced during the September parliamentary sittings, it is expected to be carried over to the November or December sittings, ATO director Kellie Grant told delegates at the Tax Institute National Superannuation Online Conference.  

 

“If the measure is passed by both houses at that time and receives royal assent, we’ll be looking at a 1 January start date,” Ms Grant said.

“Now, should the law commence before 1 July 2021, our systems may not be ready by that stage, but we will have workarounds in place until those system changes are made to allow up to six members in a fund.”

SMSF trustees and professionals, she said, need to be aware that there will be a period of time where their information may not be readily accessible in the ATO’s systems.

“[They should] also be aware that state-based state law may limit the number of individual members in a certain fund, but of course, that can be overcome by appointing a corporate trustee to the fund,” she said.

Commenting on the bill in an online article, SMSF Alliance principal David Busoli noted that if the measure does become law, the effect of additional members on control and investments will need to be carefully considered.

“Also, due to the Trustee Acts in most states — NSW, Qld, Vic, WA and ACT — a corporate trustee will be required,” he added.

Source: SMSF Adviser 

6-member SMSF bill introduced into Parliament

A measure from the 2018–19 budget to increase the number of members allowed in an SMSF from four to six has been reintroduced into Parliament, after it was scrapped prior to the election.

Senator Jane Hume has introduced Treasury Laws Amendment (Self-Managed Superannuation Funds) Bill 2020 into the Senate this week, which amends the SIS Act, Corporations Act, ITAA 1997 and Superannuation (Unclaimed Money and Lost Members) Act 1999 to increase the maximum number of allowable members in SMSFs from four to six.

The amendments will apply from the start of the first quarter that commences after the act receives royal assent.

The Coalition government first announced plans to extend the SMSF member limit in the lead-up to the 2018–19 federal budget.

Former Minister for Revenue and Financial Services Kelly O’Dwyer said the change would increase choice and flexibility for members.

The measure was previously introduced into Parliament as part of the Treasury Laws Amendment (2019 Measures No. 1) Bill 2019. However, with Labor opposed to the measure, the Liberal Party agreed to remove the amendment to increase the SMSF member limit in order to pass the other measures contained within the same bill.

The measure to increase the SMSF member limit has previously had mixed opinions, with some experts flagging the potential risks that additional members pose in terms of disputes between members and estate planning.

Other SMSF specialists have pointed out that increasing the number of members in an SMSF could raise the risk of members falling victim to elder abuse.

Other commentators in the SMSF industry have supported the measure as it provides larger families with the option of bringing their children into their fund.

Source: SMSF Adviser 

 

Control still key driver for SMSFs

The ability to have personal control over superannuation investments has remained the key driver behind the establishment of SMSFs and concerns they were being used as property investment vehicles was a minor issue, according to research group Investment Trends.

Investment Trends chief executive Michael Blomfield said research conducted for the “2020 Vanguard/Investment Trends SMSF Investor and Planner Report” found control-related issues continued to rate as the leading reasons for the establishment of SMSFs despite an increase in the level of interest in property held within an SMSF since 2015.

“In the year to September 2019, the number of SMSFs continued to grow, but at a lower rate than previous years. There were almost 600,000 funds by September 2019, but only 20,000 were set up in the 12 months before that date,” Blomfield said.

“When we talked about why they [trustees] established an SMSF, control of investments remains the big driver. Control is the number one issue by a long way for all SMSF trustees and behind that we start to get into issues related to better returns and being more tax effective.”

He said the issue of property investment was one he had to “call out” and  despite an increase in investment in property between 2015 and 2020 by SMSF trustees, as a reason for starting an SMSF it “does not get anywhere close to the drivers for control or approach the secondary drivers of better returns”.

He pointed out control was the leading factor for the establishment of a fund for 67 per cent of SMSF trustees, while property investment was the leading factor for around 32 per cent of funds and prior to 2015 was the primary driver for only 15 per cent of trustees.

While SMSF trustees continued to remain strong in their views they can make better investments than an Australian Prudential Regulation Authority-regulated fund, some trustees had hesitated to set up a fund because of regulatory concerns, he said.

“We saw in lead-up to the last federal election there was discussion about franking credits and we were not sure if that drove people to holding back or decreased their interest in SMSFs,” he said.

“Trustees have been telling us for a long time that it is regulatory uncertainty that makes them think twice, or three times, about whether SMSFs are the right place to be, and while we are still seeing growth, we have no reason to believe that has ceased.”

The report was compiled from 3156 trustee responses to a quantitative survey conducted online between February and May and also found a large unmet need for advice from trustees who had not made major changes to their SMSF investments as a result of COVID-19 market downturns.

 

Changes to your super

The recent change to change to the work test for making contributions to superannuation to age 67 has certainly raised issues with clients making contributions after 65 and how those changes impact on any contributions that are being made for them. The downside of the Government’s 2018 budget announcements for superannuation contributions is that the opportunity to use the bring forward rule is still restricted to those age 65 or younger.  

The changes to the income tax law in the Treasury Laws Amendment (More Flexible Superannuation) Bill 2020, which move the bring forward rule to age 67, remain in the House of Representatives. As parliament does not resume until early August, the bill has a way to go prior to becoming law. So where are we now with contributions for anyone 65 or older with the start of the 2020/21 financial year?

Until 30 June, 2020, personal concessional and non-concessional contributions could be accepted by a fund without any work test being met prior to the member reaching age 65. However, once the person reached the age 65 in the financial year the member was required to meet the work test at some time during that year and in all later financial years prior to the contribution being accepted.  

As with personal superannuation contributions, the fund trustee is unable to accept personal concessional or non-concessional contributions any later than 28 days after the month in which the person reaches age 75. There is one exception to the age test which is the acceptance of downsizer contributions.  

The only exceptions to the work test are where a person wishes to make contributions in the year after ceasing work and downsizer contributions.  Ceasing work contributions are permitted to be made on a once only basis after the member has reached 67, previously age 65, in a year after they have ceased work if they have a total super balance on 30 June in the previous year of less than $300,000. These contributions can be accepted by the fund trustee 28 days after the month in which the person reaches 75.

As far as downsizer contributions are concerned, a person and their spouse are eligible to each make a contribution of up to $300,000 within 90 days of selling their main residence after age 65. There is no upper age limit applying to downsizer contributions or any work test that needs to be satisfied.

Anyone who is employed after age 65 may be eligible for compulsory employer contributions and if they meet the work test, they may wish to salary sacrifice to super. 

Employer-mandated contributions, such as those made for super, guarantee purposes or under an industrial award, are not subject to a work test or age limit. However, other employer contributions, including salary sacrifice, are subject to age limits described above.

The changes to the work test requirements have been extended to include non-concessional contributions made for an eligible spouse. The age restriction which applied up to 30 June, 2020, permitted spouse contributions to be made between ages 65 and 70 providing the spouse met the work test. 

From 1 July, 2020, this is now extended to apply for spouse contributions made between 67 and 28 days in the month after the spouse reaches 75 in line with other personal superannuation contributions. The work test is required to be met prior to contributions being made to the fund.

In relation to the operation of the bring forward rule for non-concessional contributions, those fund members who are in the 65 to 66 age bracket are in a bit of a dilemma from now until the time when the passage of the legislation is clear. It is only those members who have a total superannuation balance of less than $1.5 million as at 30 June, 2019, or 2020 that should be concerned if they wished to maximise their non-concessional contributions by using the bring forward rule.  

The rules for non-concessional contributions allow up to two years standard non-concessional contribution to be brought forward if the total super balance as at 30 June in the previous financial year and up to one year standard non-concessional contribution  is between $1.4 and $1.5 million. Anyone with a total superannuation balance of greater than $1.5 million on those dates does not have access to the bring forward rule for the subsequent financial year.

As an example of the operation of the bring forward rule, a person who is currently 65 would have access to the bring forward rule of at least one year standard non-concessional contribution assuming their total super balance is less than $1.5 million. If they contribute greater than the standard non-concessional contribution, the bring forward rule will be triggered and they will be able to make the relevant contributions over a two or three year period. If they make the contributions prior to reaching age 67 the fund can continue to accept the contributions without requiring the member to meet the work test.

In contrast, a person who is currently 66 or 67 will not be able to trigger the bring forward rule as they were older than 65 on 1 July in the 2020/21 financial year. This will limit the maximum amount of non-concessional contribution they can make without penalty to $100,000 p.a., however, the consolation is that there is no requirement for them to meet the work test unless they wish to make contributions in the financial year after they reach 67.

Source: moneymanagement.com.au

Important eligibility condition flagged for early release of super

SMSF clients that have been unemployed for a number of years may be eligible for early release of super, but it is vital they are able to show that they are facing financial difficulty, says a technical expert.

SMSF Association deputy chief executive Peter Burgess explained that in order for clients to apply to access their super early, they need to meet at least one of the eligibility conditions.

“In addition to a client meeting at least one of these conditions, they also need to show that they’ve been adversely impacted by the pandemic,” Mr Burgess said at the SMSF Association Technical Day last week.

With some of the conditions, it’s quite obvious that the client has been financially impacted, he said.

“[For example], if they’ve been made redundant as a result of the pandemic or their hours have been reduced, then it’s pretty obvious that they’ve been impacted and that they qualify,” he explained.

Other conditions, however, are not as obvious, he noted.

“Where the client is unemployed and perhaps has been unemployed for a number of a years, it may not be so obvious that they have been financially impacted by the pandemic,” he said.

“In fact, we’ve had a number of advisers ask us questions about unemployed clients. The common scenario is where the client has been a stay-at-home parent and they’ve been unemployed for many years.”

They can qualify to access their super early under this measure, Mr Burgess said, as long as they can show that they have been financially impacted by the pandemic.

“It’s been put to us that it’s not difficult to show that someone has been impacted. The fact that they’re paying more for their toilet paper could be an indication that they have been financially impacted, but that’s clearly not the intent of these provisions,” he stated.

“So, in addition to meeting one of these conditions, they also need to show that they’re facing difficulty making ends meet and those difficulties have been caused by the coronavirus.”

Source: SMSF Adviser

Lesser known change, and an unfortunate delay, leave their mark

There were several important bills passed during the June 2020 parliamentary sitting, none more so than the bill that provides a much needed 12 months extension for financial advisers to pass the FASEA exam.

One bill, the Treasury Laws Amendment (registries modernisation and other measures) Bill 2019, which passed both houses of parliament on 12 June 2020 without much attention, contains a new initiative which will impact SMSFs with a corporate trustee.

This new initiative will require all directors, including the directors of a corporate trustee that acts as the trustee of an SMSF, to obtain a Director Identification Number (DIN). It applies to a person who is a director of a registered body which, for the purposes of this law, includes a company, registered foreign company or registered Australian body which is registered under the Corporations Act. 

 

The new DIN regime is being introduced to deter and detect phoenix activity which occurs when the controllers of a company deliberately avoid paying liabilities by shutting down an indebted company and transferring the assets to another company. According to the Explanatory Memorandum that accompanied the bill, it is estimated that phoenixing costs the Australian economy somewhere between $2.9 billion and $5.1 billion annually.  

A person will keep their unique DIN permanently even if they cease to be a director and it’s not intended that a person’s DIN will ever be re-issued to someone else or that one person will ever be issued with more than one. As such, the DIN will provide traceability of a director’s relationships across companies, enabling better tracking of directors of failed companies and will prevent the use of fictitious identifies. 

It will also help regulators and external administrators to investigate a director’s involvement in repeated unlawful activity including illegal phoenix activity. Although the law has in the past required directors’ details to be lodged with ASIC, it has not required the regulator to verify the identity of directors.  

Under the new regime the Minister will appoint an existing Commonwealth body to be the registrar. The registrar will be responsible for the administration of the regime including the processing of DIN applications. After receiving an application, the registrar must provide the director with a DIN if the registrar is satisfied that the director’s identity has been established. This is the case unless a DIN has already been issued to the director as the integrity of the regime requires each director to hold no more than one DIN.  

To allow sufficient time for the development of systems, processes and new technology, the DIN regime will not commence until 12 June 2022, unless an earlier date is set. All existing directors, including acting alternate directors, at this time will be given a period of time to apply for a DIN. 

A person who is appointed a director within the first 12 months of the new regime’s operation will be given 28 days to apply for a DIN. After this transitional period ends, the standard rule applies, that is, a director must apply for a DIN prior to being appointed as a director. This transitional period is designed to provide time for new directors to become familiar with the new requirement and for any information or awareness campaigns in relation to it to take effect.

From 12 June 2022 (or an earlier date if one is set), SMSF establishment processes will need to be updated to ensure a person who is to be appointed as a director of the corporate trustee of the fund has a DIN. If the person does not already have a DIN, during the transitional period, an application for a DIN will need to be made within 28 days of their appointment as a director. After this transitional period ends, the application for a DIN must be made prior to their appointment as a director. The same rules will apply to a person who, from 12 June 2022 (or an earlier date if one is set), is appointed as a director or alternative director of a company that was in existence at 12 June 2022.

While the need to obtain a DIN introduces an additional step for SMSFs established with a corporate trustee, it should be remembered that a corporate trustee has many advantages over an individual trustee structure and should remain the preferred option for clients. The introduction of the new DIN regime will enhance the integrity of the SMSF sector by ensuring the identity of a person who is or will be the director of a company that acts as the corporate trustee of an SMSF, has been verified by a Commonwealth body. It should also help to ensure that those who act in the capacity of a director of a corporate trustee of an SMSF are not disqualified from doing so.  

What has not changed  

While the regulations to allow individuals aged 65 and 66 to make voluntary superannuation contributions without satisfying a work test have been passed, unfortunately amendments to the Income Tax Assessment Act 1997 to allow these individuals to bring forward their non-concessional contributions, did not pass the June sitting of Parliament. 

This change is slated to start from 1 July 2020 but will now not be passed until after this date. While we can’t assume this amendment will be passed by the Parliament, we don’t consider this amendment to be politically controversial and therefore expect it will receive a smooth passage through the Parliament when it sits again later in the year. Once passed we expect this amendment will apply from 1 July 2020, as originally intended.

The delayed passage of the legislation does create some difficulties particularly for clients turning 65 in the 2019/20 financial year. If the law is amended as intended, clients turning 65 in the 2019/20 financial year who have the capacity to contribute $300,000, and are looking to maximise the amount they can contribute in the remaining few years before their retirement, may be better off not triggering the bring-forward period until the next financial year. 

Staying across the measures which have now been enacted, those that have not and measures from other bills which impact on SMSFs, is never an easy task. In the current environment, where legislation has been rapidly changing, it has never been more important for advisers to stay up to date with the latest developments and strategies. 

Source: SMSF Adviser & SMSF Association

SMSF liquidity lessons learned from the pandemic

Sometimes it’s true that you don’t know what you’ve got until it’s gone.

There will be many lessons learned from this coronavirus pandemic and its impact on our lives and investment portfolios.

Few people will view risk – be it to their health or investments – through the same lens again for a long time, if ever.

Rewind to the early days of a bright new year in January.

The notion of a global pandemic that would kill almost 280,000 people and shut down the world economy would have belonged firmly in the realm of Hollywood disaster movies, rather than something you or your super fund had reason to worry about.

Liquidity is one thing that investors take for granted, particularly after an extended period of strong markets growth and, in Australia’s case, no economic recession for 29 years.

However, times of severe market disruption and turmoil effectively stress-test investment portfolios and superannuation, as well as their need for liquidity.

Large super funds have been part of the debate on liquidity, in part because of their need to rebalance portfolios affected by the share market’s drop, as well as a financial hardship support package initiated by the federal government that includes early release of retirement funds.

But it’s not just the fund titans that are rethinking their approach.

Self-Managed Super Funds (SMSF) are also finding they need to focus more on liquidity – particularly when members are approaching or are already in the drawdown, or pension phase.

Super is a long-term investment. So, liquidity can often be traded off when the funds will not be needed to be drawn down for 30 or 40 years.

For SMSF trustees in their 30s or 40s, liquidity is more an opportunity than a risk.

However, for those in retirement the situation shifts. The purpose of super becomes to provide income to fund or supplement your lifestyle once the regular pay-cheque has stopped.

How you manage your SMSF’s liquidity becomes critical at this time because it is your responsibility as a trustee to be able to pay expenses of the fund and benefits to members, as required.

The liquidity challenge for SMSFs invested predominantly in one illiquid asset, such as property, can be dramatic when things do not go to plan.

There are significant risks for those with concentrated direct property portfolios.

Last year, the Australian Tax Office quizzed more than 18,000 SMSF trustees about the diversification of fund portfolios. The letter was sent to trustees that had more than 90 per cent of their SMSF assets in a single asset class – typically property.

The ATO was not saying that you could not invest in just one asset class – it just wanted trustees to be sure they understood the risks – particularly if limited recourse borrowing was involved – on return, volatility and liquidity and a properly considered investment strategy.

At the time, there was discussion around whether it was a proper role for the ATO to ask such a question.

However, for trustees that heeded the warning about the risks of lack of diversification and the potential liquidity risk, it was prescient indeed.

Written by Robin Bowerman, head of corporate affairs at Vanguard Australia. 

Source: Sydney Morning Herald

Contributions level out after 2017 reforms

Contributions reverted to normal during the 2018 financial year, following an atypical jump in contributions in anticipation of the July 2017 superannuation reforms, the latest ATO SMSF figures have revealed.

According to the ATO statistical overview for the sector regarding the 2018 financial year, total contributions to SMSFs increased by 32 per cent to reach a high of $41.8 billion in 2016/17, with total SMSF benefit payments increasing by 31 per cent to $46 billion in the same year.

During the 2018 financial year, however, total contributions dropped to $17.4 billion and total benefit payments decreased to $37.7 billion.

In its analysis of the figures, the SMSF Association noted: “[The 2016/17 figures] were significant increases over the previous financial years, most of which can be attributed to a behavioral change resulting from the introduction of the superannuation reforms taking effect on 1 July 2017.

“With the release of the 2017/18 statistics, we now have a reversion to the norm.”

The association pointed out member contributions declined the most during the 2018 financial year, falling to $11.6 billion after peaking at $33.9 billion in 2016/17.

“This is likely due to the fact many SMSFs would have used their three-yearly contribution bring-forward rule in the previous financial year,” it noted.

As part of its analysis, the industry body also highlighted a sharp increase in lump sum withdrawals from SMSFs during 2017/18, which it attributed to the introduction of the transfer balance cap (TBC).

“As SMSFs moved money into accumulation phase and the TBC took effect, they took the opportunity to withdraw funds as a lump sum to keep a larger amount in retirement phase,” it said.

“If lump sums were taken from the retirement phase, this would create debits to their TBC.”

The ATO’s report also revealed the growth in the number of SMSFs reporting limited recourse borrowing arrangements had steadied and is increasing at a manageable rate.

In addition, the ATO found the level of SMSF wind-ups hit a record high during the 2018 financial year, while new establishments fell away.

Source: SMS Magazine

ATO outlines tax return changes for SMSFs this year

The ATO has highlighted some of the new measures and changes to be aware of when completing tax returns for clients this year.

In an online update, the ATO provided an outline of some of the specific measures and support available for individuals impacted by COVID-19 as well as some changes specific to SMSF clients.

Updated SMSF instructions

The ATO said that the instructions for “Section A: SMSF auditor Part A” have been updated to help clarify the requirements for the fund. 

“This question can now be answered as ‘No’ if the audit report was qualified only in relation to insufficient audit evidence under Auditing Standard ASA 510 Initial Audit Engagements – Opening Balance,” the ATO explained.

Question 6D also no longer includes Part A qualifications, the ATO said. This question relates only to rectifying to Part B of the audit report.

A new label, J7 Property count, has been added to section H: Assets and liabilities at 15b.

“If your SMSF holds investments in real property that was held in trust as a security under a limited recourse borrowing arrangement, this information must be reported at J7 Property count,” the ATO explained.

Label G1 Death benefit increase at Section C, Deductions and non-deductible expenses has now been removed.

“If a fund member died on or before 30 June 2017, the fund must have paid the benefit before 1 July 2019 to be eligible to claim a deduction. From 1 July 2019, the deduction is no longer available,” the Tax Office stated.

NALI changes

The ATO reminded SMSF professionals that from 1 July 2018, NALI was expanded to also include income derived by an SMSF from a scheme in which the parties were not dealing with each other at arm’s length.

“This is where the fund incurred expenses (including nil expenses) in deriving the income that are less than those which the SMSF would otherwise have been expected to incur if the parties were dealing on an arm’s-length basis,” it explained.

“The expenses may be of a revenue or capital nature in the same way that NALI may be statutory or ordinary income.”

From 1 July 2018, income derived by an SMSF in the capacity of beneficiary of a trust through holding a fixed entitlement to the income of the trust will be NALI where both:

  • The SMSF acquired the entitlement under a scheme or the income was derived under a scheme in which parties weren’t dealing with each other at arm’s length.
  • The SMSF incurred expenses in acquiring the entitlement or deriving the income that are less than, including nil expenses, what the SMSF would otherwise have been expected to incur if the parties were dealing on an arm’s length basis.

Source: SMSF Adviser

Property and my SMSF

Directly held property makes up approximately 19% of all SMSF assets, indicating that many SMSF trustees consider it’s an important and significant part of a diversified portfolio.  There are numerous strategies and ways for property to form part of an SMSF’s investments and each must be carefully considered.

Investment strategy first!

Before any investment decision, it is imperative and a legal requirement that you as an SMSF trustee must consider your investment strategy. Your strategy should detail such things as how much exposure you would like to the property market, the form of exposure and how appropriate it is for your current circumstances. A well-diversified portfolio is essential to provide income for retirement and spread investment risk so that any single asset class, such as property, does not dominate your SMSF risk and returns.

Direct investment

A common form of property exposure is direct investment into a property. This can be in the form of either a residential property or commercial property. When purchasing a property with an SMSF’s cash there are some important considerations that must be worked through including:

  • Your asset allocation and diversification.
  • Potential rental income and property expenses.
  • How close you are to retirement and the need for liquid assets to pay pensions.
  • Unless the property is a business real property (BRP) you or your related parties cannot use the property:
    • If the property is BRP you may be able to work from the premises which is owned by your SMSF.
    • You may also be able to utilise the small business CGT concessions and contribution limits.

Limited Recourse Borrowing Arrangements (LRBA)

SMSFs may also invest in property through an LRBA. These are complex borrowing structures which allows SMSF trustees to take out a loan from a third party lender. The SMSF trustee then uses these funds to purchase a property to be held on trust. The lender only has recourse to the property held in the trust – this is why the loan is “limited recourse”.

An LRBA should only be utilised when it is the right structure for your SMSF on the basis of SMSF Specialist advice. Some very important considerations in addition to the ones above include:

  • Can your SMSF maintain the loan repayments over a long period of time considering asset returns, interest rates, liquidity, and contributions caps?
  • Evaluating set-up costs and structures.
  • Is your property valuation accurate?
  • You cannot use borrowed money to improve the asset or change the nature of the property at any time.
  • Do you meet the strict bank lending requirements?
    • Typically, lenders require the SMSF to have a minimum of net assets of $200,000 or more and for the loan to have a loan to value ratio below 70%.

Indirect investment

Another way to gain exposure to property for SMSFs is through indirect investment. This can include listed invested vehicles such as, listed investment companies and exchange traded. Managed investment trusts are also a common investment for SMSFs to gain exposure to property. Investing indirectly may suit your SMSF needs more than a purchase of a property because it is relatively simple and most likely will not require a large amount of capital. It also allows your SMSFs to get exposure to large value properties such as office blocks, shopping centres and industrial properties that would otherwise be out of reach. Investing in these products should be accompanied by SMSF Specialist advice.

Source: SMSF Association